Financial Resource

Article by BT Financial

It’s no secret that the current global resource boom has been kind to Australia. It helped our economy weather the global downturn in far better shape than many other developed nations, and lets us enjoy bright prospects for the future. Summing up the benefits of the resource boom, Phillip Lowe, Assistant Governor of the Reserve Bank of Australia (RBA) recently noted, “The prices of commodities have risen substantially. Investment in Australia is high and Australian assets are again viewed as attractive by international investors.”For all the positives, the big question is how long can the good times last? To answer this, and discover how investors can ride the crest of the resource boom, it’s worth taking a look at what’s fuelling demand for our resources. And the answer lies to our north. Throughout Asia, key structural changes are taking place. At the heart of these changes are the processes of urbanisation and industrialization – both of which require raw materials. China, the world’s most populous nation, is experiencing a level of urbanization unprecedented in human history. Over the past three decades, almost 400 million of China’s people have resettled from regional areas to the nation’s urban centres. And the phenomenon is far from complete. Reserve Bank research suggests another 300 million to 400 million people could move from the country to China’s cities over the next 20 years.All these people require homes, and to build a typical 90m1 apartment in China requires about six tonnes of steel. Every tonne of steel produced requires around 1.7 tonnes of iron ore and over half a tonne of coking coal.1 Australia has an abundant supply of both. Not surprisingly, since the beginning of the resource boom in around 2005, prices for iron ore have increased by over 400% and prices for black coal have increased over 200%.But the boom isn’t just about China. The RBA notes that over the years ahead, the Indian economy, which accounts for more than 20% of the world’s population, is likely to become increasingly important to Australia.For all the positives, the big question is how long can the good times last?Little wonder then that the Federal Government’s proposed 40% Resource Super Profits Tax, announced earlier this year attracted so much ire. Many saw it as killing the goose that lays the golden egg.Following intense negotiations, the Federal Government scrapped the Super Profits Tax, replacing it with the new watered down Minerals Resource Rent Tax (MRRT). The MRRT will apply a 30% rate to just coal and iron ore from 1 July 2012, and only 320 companies will be affected by the MRRT, rather than the 2500 anticipated to be affected by the Super Profits Tax.Predicting the path of global commodity prices is no easy task. What appears more certain is that the modernisation of China, and many of its neighbours, will underpin demand for Australia’s resources for some time to come.For investors the situation creates opportunities. If you’re invested in a BT managed fund with an allocation to Australian shares, you’re likely profiting from the Australian resource boom – the ASX 200 is dotted with companies already making strong gains from our rich dirt.

Tags: coal, dirt, global downturn, MRRT, reserve bank of australia rba, rich dirt